How the coronavirus outbreak could kill steel's fragile recovery

Topics Coronavirus | China | steel

As steel production in China in 2019 was up by an impressive, but so­mewhat unexpected 8.3 per cent to 996.3 million tonnes (mt), the country’s share of the world output of 1.87 billion tonnes (bt) rose to 53.9 per cent from 50.9 per cent in 2018. In aluminium and copper too, the world’s second largest economy has a predominantly big share of global production and consumption. What is more, with the country being ag­gressively engaged in infrastructure bui­lding and construction ac­tivities with stimulus often provided by Beijing, most of its metal production is consumed locally. Therefore, any major disruption in factory and other economic activities due to coronavirus will hit the local metal producers as it will unavoidably have a knock-on effect on markets outside China. 

No wonder then, with president Xi Jinping having declared a “people’s war” against the de­adly coronavirus, a new pneumonia-causing virus, whose impact is also felt outside China, the metals market is in jitters with steel, aluminium and copper and also the principal raw materials that go into their making recording fall in prices. China has the largest share of the global seaborne trade in iron ore, bauxite and copper concentrate to feed its oversized metal industries. Restricted port operations and truck and rail movements in China could not, but shave raw material prices.

The principal concern for steel makers globally is the fast spread of coronavirus globally has the potential to throttle the nascent recovery in steel demand and prices since November 2019. Last year was nightmarish for the industry, which had to contend with slumping demand for steel from automobile sector in particular and bear the brunt of trade skirmishes between the world’s two largest economies.

ArcelorMittal, the world’s largest steel maker with its 2019 crude steel production at 89.8 mt against 92.5 mt in 2018 might have downplayed the impact of coronavirus by saying the disease “will likely have a short-term negative demand impact in that country (China) and to a lesser degree elsewhere.” In a conference call following the announcement of 2019 results, Aditya Mittal, chief financial officer of ArcelorMittal, spoke of a weak first quarter as a result of coronavirus-related health crisis followed by a rebound in the second half. Therefore, the “overall impact will be muted,” said Mittal.

Several hundred people dying and thousands contracting the virus leading the authorities to virtually put a ban on long-distance travel by road and rail have, however, led China-focussed consultancies to wait and watch how quickly and effectively the Chinese machinery is able to combat the coronavirus before they give estimates of its impact on steel production and demand. Whatever these may be, the consensus among China watchers is that coronavirus will harm the steel and other metal industries in a much bigger way than the 2003 outbreak of severe acute respiratory syndrome (SARS). For one thing during the SARS outbreak, 349 people died in mainland China. Coronavirus had already claimed a few hundred more lives than SARS. The Chinese steel, aluminium and copper industries have grown enormously in size along with building up of downstream units since 2003. Therefore, coronavirus has the potential to inflict greater damage to the economy than was the case during SARS crisis.

This has led Edinburgh-based mining and metals consultancy Wood Mackenzie (WoodMac) to say that the new virus outbreak will take a greater toll of the economy and markets than what happened a decade-and-a-half ago. WoodMac says in a report: “During the SARS outbreak, construction activities slowed due to shortage of workers and a slump in consumer demand. SARS led to China’s economic growth slowing in the second quarter of 2003, by around 2.2 per cent quarter-on-quarter.” Wiser by the experience of handling the 2003 crisis, the Chinese authorities have put a transport ban virtually keeping people quarantined. In a precautionary move, the weeklong Chinese Lu­nar New Year leave was not only extended a couple of times, but workers when they are able to return to places of work will be required to go through a quarantine period of anything up to 20 days.

Emergency steps to cap the spread of the virus will inevitably result in postponement of start of construction projects, a sector roughly accounting for two-thirds of China’s steel use. This will have an immediate impact on the demand for the metal and raw materials that go into its making. In August 2019, iron ore prices got a leg-up on reduced supply following tailings dam collapse at Vale’s mine at Brumadinho in Brazil and then subsequently by steel production in China rising at rates higher than what analysts did forecast. But now gripped by fear of the impact that the new killer virus will have on demand, traders have brought iron ore prices down by around 12 per cent.

With 30 Chinese provinces introducing the highest level of health emergency curbing demand for all commodities, the prices of steel products, base metals such as copper and aluminium, crude and edible oil have all shed ground. To give two examples, copper on London Metal Exchange is performing at its worst since 2005 and Malaysian palm oil lost the most since 2008; however, India’s boycott remains a contributing factor. An Indian shipping industry official says: “So large is China’s seaborne trade, any setback there will have a negative impact on already low freight rates. This is the lean period for shipping and the breakout of coronavirus coincided with it. But in case economic activities in China don’t return to normal soon, then that would have a crippling impact on the already stressed shipping industry.”

Though early in the day, from Gold­man Sachs to S&P Global Ratings to Citi,  all have cut growth forecast for China for the first quarter of 2020 and also the full year, Nomura now pegs the first quarter growth at 3.8 per cent compared with 6 per cent in the fourth quarter of 2019. In this context, the global steel outlook re­leased by World Steel Association (WSA) last October that projected the demand in 2020 rising by 1.7 per cent largely supported by one per cent growth in China on a base of 900.1 mt calls for a review. Hopefully, the industry in India will not suffer collateral damage from coronavirus. WSA says India, which is the world’s second largest producer and user of steel, will have a finished steel demand growth of 7 per cent to 108.7 mt in 2020 on the back of a 5 per cent rise to 101.6 mt last year. The country’s focus on infrastructure development and affordable housing will allow steel demand to grow at a rate higher than the projected 2020 GDP growth rate. Margins of Indian steel producers will, however, continue to remain under pressure.

Viral impact

• In 2003, SARS outbreak slowed construction activity in China
• Growth slowed by 2.3 per cent in Q2 of 2003
• Construction activity accounts for two-third of China's steel demand
• World Steel Association expects demand to grow by 7 per cent in India in 2020

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